Who Steered You Wrong About the GS Case?

Amongst the regular complaints I have about the financial media is the lack of accountability of alleged experts. The bad stock picks, the terrible market calls, the unsupported opinions, all blithely made and forgotten. Yet the same experts are trotted out week after week to give more money losing advice.

The silver lining to this institutionalized incompetence is that its good for business for those who are not incompetent. Nonetheless, it is horrifying to watch on a daily basis.

Nowhere has the lack of qualifications been more evident than in the coverage of the SEC indictments of Goldman Sachs. The parade of pundits who opined about things they knew nothing about was an impressive display of the blind leading the foolish. The silliness got so bad that it forced to stop doing more important things to post 10 Things You Don’t Know (or were misinformed) About the GS Case. I was surprised that this became the single most read post in the Big Picture’s history.

Now that Goldman Sachs has lost their will to fight and settled the case for a record breaking amount, the same media fools who told you a) this was a weak case and b) GS was going to win are now spinning this massive Goldman Sachs defeat as some sort of a Goldman victory.

Don’t believe them. This is a painful loss for Goldman Sachs, with expensive repercussions likely to last far into the future:

• Our “no-brainer” bullet point proved to be dead on: GS conceded misleading disclosures, and hence was forced to settle. This will be important in related actions (keep reading).

• As we noted yesterday, Goldman paid the highest fine/settlement in the history of the SEC. For an ego-driven corporate culture such as Goldie, that is a painful loss. Silver lining: Settlement was under a billion dollars. Regardless, expect some high profile resignations to follow.

• Goldman admitted material omissions/misstatements in their marketing materials; They disgorged profits and made up investor losses (Yves notes IKB and ACA were made whole). When you admit to misleading investors, you open the firm to future liability from all clients who bought money-losing synthetic derivative products. Hence, this is a significant litigation risk for GS — client civil suits to follow.

• The latest brain dead spin: “The settlement is only the price of a few days’ revenue.” See here and here. This is a classic example of conflating two unrelated issues: 1) The biggest SEC settlement ever; 2) GS is an incredible money machine. But the latter says absolutely nothing about the former. The bottom line remains this is a black eye, and an early Christmas present for the litigators who represent Goldie’s clients who lost money on CDO deals.

• Bloomberg reports that the settlement changes the vetting and approval process for the marketing of structured securities. “Those changes will probably lead to a new industry standard for disclosures in private sales of securities, even to the most sophisticated investors.”

In other words, the entire street, and not just Goldman Sachs, lost this case.

• Here is a question for GS shareholders: Why didn’t Goldie write a $20 million check to settle this a year ago? What sort of bad legal advice did they get, and from whom? What executives allowed what should have been a simple action to turn into a record setting settlement?

• First Moody’s now Goldie: Warren Buffett is the other loser in the case. His claim that GS didn’t commit fraud was wrong. Now Buffett looks like just another shareholder defending an investment, right or wrong. There is mud on his formerly squeaky clean reputation.

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Which leads me to our headline question: What media pundits, talking heads, and other fools completely blew this one?

I don’t mean honest analysis that turned out to be incorrect — that is part of engaging in informed debate, using imperfect information, about unknowable future outcomes. What I am referencing is — who really shat the bed on the Goldman Sachs case? Who got this totally wrong? Who continues to get this wrong?

Originally published at The Big Picture and reproduced here with the author’s permission.

One Response to "Who Steered You Wrong About the GS Case?"

Guest July 18, 2010 at 9:54 pm

Getting the SEC to settle here and substituting “mistake” for “fraud” in the order, to say nothing of preserving current management intact, was hardly a defeat for Goldman. The order’s provision for special internal scrutiny of future mortgage finance by the same legal/compliance people who oversaw the deception at issue in the case (and no doubt in others) does not mean radical change for Goldman or anyone else. Being permanently enjoined to obey Section 17(a) of the Securites Act in the future doesn’t mean much either.After all, that’s what one is suposed to do when offering and selling securities. At best this thing was a draw. Going for the throat by litigating it out and pressing for criminal charges by DOJ would have been a better result for everyone other than Goldman, its people, and others of its ilk. We didn’t get that, though.